Inflation Is Comparable to a Wave Because It Unfolds in Three Stages. And We Are Only at the Foam.
The worst is yet to come.
Everyone is talking about high inflation right now. With inflation reaching 8.5% in America and 7.5% in the eurozone in March 2022, it is logical that the subject is on everyone's lips. However, if the topic of inflation has come to the forefront of public attention, it is primarily through the prism of the commodity price shock, especially energy supplies.
However, this shock is only the first act of a three-stage movement. Inflation can thus be read as three components of a single wave. Here is a complete description of the situation using this analogy.
1. The foam
The first component of a wave is foam.
This is the rise in prices that comes from an exogenous shock: the formation of a shortage in supplies, whether proven (semiconductors) or feared (certain metals, food products), a break in the links of the value chain (maritime freight, for example), or a market imbalance (gas and, consequently, electricity prices, oil).
This foam can be boiling: if energy prices remain at their March 2022 level until the end of the year, they will contribute 2.4 percentage points to inflation in France and cut the purchasing power of French households' income by 1.9 percentage points. However, public interventions have removed more of the foam in France than in other European economies, with these proportions being 3.8 and 3.2 points respectively at the level of the entire eurozone.
This foam can also be persistent, or even mutate: increases in food prices are also a consequence of increases in energy prices due to the impact of the latter on agricultural production costs. But the froth can also disappear when counter-shocks occur as a result of stimulation in supply and a reduction in demand for the products concerned.
In the past, these counter-shocks have taken several years to appear: the 1985 oil counter-shock after the 1979-80 shock or the 2014 counter-shock after the 2006-2008 shock. In the meantime, prices remain at a high level.
2. The wave itself
The second movement is the wave itself. It is the rise in prices of products using the supplies embedded in the foam. There are delays, but price increases inevitably occur. Thus the acceleration in manufactured goods prices to 2.2% year-on-year, a pace not seen since 1990, is largely a shadow of the 2021 commodity price rise.
The price-wage-price loop is also characteristic of the wave. Although the mechanisms for indexing wages to prices have been reduced, the elasticity of wages to inflation remains high: according to a study by the Banque de France, one point of inflation would lead to an increase of 0.6 in minimum wages.
However, there is a delay: mandatory annual negotiations are often conducted at the end or beginning of the year and discussed based on actual rather than anticipated inflation. It is, therefore, more likely to be at the end of 2022 or the beginning of 2023 that the evolution of conventional wages could accelerate. The prices of labor-intensive services would then accelerate more significantly in response to the likely rise in wage costs.
3. The groundswell
The third movement is that of the groundswell: it is that of the structural determinants of inflation. Two particular features are emerging: that of an energy transition that is necessarily inflationary, especially in the presence of rising costs of climate damage.
The second feature is that of demographic aging: by reducing the supply of labor relative to the population and by inducing a shift in the structure of demand towards labor-intensive goods and services (health, personal care, the care economy, …), it supports the rise in wages for unchanged technology.
This three-beat waltz may go back and forth. Above all, it will lead us to live with an inflation regime that is probably permanently higher than that of the last twenty years, which has been only 1.4% per year. The conclusion is that we will have to learn to live with persistently high inflation. Something new for the younger generations.
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